Good day everyone and welcome to the CytoSorbents Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will open the call for your questions. Please be advised that the call will be recorded as the Company's request. At this time, I'd like to turn the call over to our moderator, Bob Yedid, Please go ahead Mr. Yedid.

Thank you and good afternoon. Welcome to CytoSorbents second quarter 2017 operating and financial results conference call. Joining me today from the Company are Dr. Phillip Chan, Chief Executive Officer and President; Kathleen Bloch, Chief Financial Officer; Vince Capponi, Chief Operating Officer; Dr. Eric Mortensen, Chief Medical Officer; Dr. Christian Steiner, who is Vice President of Sales and Marketing joining us from Germany; and Chris Cramer, VP of Business Development. I'd like to remind listeners that during the call, management's prepared remarks may contain forward-looking statements which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the Company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today. And therefore, we refer you to a more detailed discussion of these risks and uncertainties in the Company's filings with the SEC. Any projections as to the Company's future performance represented by management include estimates today as of August 7, 2017, and we assume no obligation to update these projections in the future as market conditions change. During today's call, we will have an overview presentation covering the financial and operating highlights for second quarter by Dr. Chan and Ms. Bloch. Following that presentation, we will open the line to your questions during the live Q&A session with the rest of the management team. With those remarks at this time, it's now my pleasure to turn the call over to Dr. Phillip Chan. CEO. Phil?

Thank you very much, Bob, and good afternoon everyone. We appreciate the opportunity to review our second quarter 2017 financials and provide you with an update on our progress and accomplishment so far. It's been a busy year and we're very proud here of our team and the tremendous growth in revenue this quarter that we achieved. Specifically, we achieved total revenue of 3.6 million and for the first time, we achieved $3 million in the quarter for CytoSorb sales on record direct and distributor sales. In addition, we have more than 27,000 CytoSorb treatments delivered and increased from 14,000 a year ago with continued strong reorder rates. In addition, we have excellent progress on German CytoSorb reimbursement rates in a survey of many key accounts that covers both the device as well as the cost of the procedure. This is important as Germany is one of our largest contributors to revenue. We're pleased to see that Germany recognizes the benefits of our CytoSorb treatment and are working to gain similar reimbursement outcomes in other countries. In addition, we extended our partnership during the quarter with Aferetica in Italy through 2021 with cumulative sales expected to exceed $10 million during that period for Italy alone. Also as catalyst both CytoSorb and Fresenius will begin our co-marketing effort soon in five major countries. In addition, we expect that the eminent ECMO kit availability will also help catalyzed sales. We're expecting that the second half of 2017 in terms of CytoSorb sales will exceed that of the first half of 2017 and we reiterate our guidance on achieving operating profitability in 2018. On the clinical front, we think Dr. Robert Bartlett, our former Chief Medical Officer, who is retired for his many years of support, guidance and camaraderie. Although, it was difficult…

Thank you, Phil, and good afternoon everyone. For today's call, I will provide an update regarding CytoSorbents second quarter 2017 financial results including product sales progress and also provide an update around our working capital and cash runway. So our total revenues which includes product sales and grant revenue were a record $3.6 million for the second quarter of 2017 as compared to approximately $2.2 million for the second quarter of 2016, an increase of approximately 60%. CytoSorb product sales for the second quarter 2017 were approximately $3 million which is our best quarterly product sales ever. This represents a 64% increase over the product sales of approximately $1.9 million for Q2 2016. Our Q2 2017 annualized product sales run rate rose to $12.2 million compared to our annualized run rate of approximately $7.4 million one-year ago. Q2 2017, gross margins rose to approximately $2.1 million, an increase of approximately $735,000 as compared to gross margins of approximately $1.3 million for Q2 2016. And our gross profit margins on product sales were approximately 65% in Q2 2017 as compared to 68% for Q2 2016. This is primarily as a result of the mix of direct and distributor sales. Turning to our six months financial results, CytoSorb product sales for first half of 2017 were approximately $5.6 million, which is a 63% increase over product sales of $3.5 million for the first half of 2017. Grant revenue grew 79% from $582,000 for the first half of 2016 to $1 million for the first half of 2017, largely as a result of incremental revenue from new grants. Total revenues which of course includes product sales and grant revenue were approximately 6.7 million for the first half of 2017, as compared to $4 million for the same period in 2016, an increase of…

Thank you very much, Kathy. Recently, we had a lot of shareholder interest in our plans for sepsis and I want to take a moment to explain our strategy. As most of you know such as it remains the top 10 killer worldwide, it's a result of no results immune response to an infection and is driven by cytokine storm. Based on recent estimates, it reflects approximately 30 million people worldwide every single year and is growing due to the aging baby boomer population were very susceptible to getting sepsis and well as the increase in drug resisting bacteria. Today, severe sepsis kills approximately one in every three people despite the best medical treatment that includes the antibiotics. And it kills more people in U.S. than either heart attacks, strokes or any single type of cancer for no proof that will be also treated with virtually no drugs, biologics or devices in Phase III clinical study, and at an average cost of more than 45,000 to treat hospitals are losing money annually. So, the sepsis crisis is now. In May 2017, the World Health Organization or WHO mandated sepsis as a global health priority, and in July 2017, Bloomberg declared that America has a $27 billion of sepsis crisis. As you can see from the chart from the Bloomberg on the right-hand side, the incidents of sepsis continues to rise and although standards of medical care continue to improve helping reduce the mortality of sepsis, and as we recognize sepsis earlier, the overall mortality sepsis has been declining. There is no question that sepsis will remain an equal opportunity killer and is not going away any time soon. Now, sepsis has defied pretty much any solution. There have been more than 100 Phase II and Phase III clinical trials exploring…

[Operator Instructions] And we will take our first question from Joshua Jennings with Cowen & Co. Please go ahead.

Just want to ask Phil, if you don’t mind. This one is on German reimbursement, I mean, clearly you had some comments in your prepared remarks. But specifically, can -- should we be thinking about German hospitals and the recognition of the new codes specific to Cytosorb and the absorption with cytokine filtration as [indiscernible]? And if that is the case, was that something that happened during Q2 and was at the midpoint or at the latter stages of Q2? And should we think about German imbursement benefiting Cytosorb in the back half of the year?

I think that for those familiar with that reimbursement system, what we said before is that hospitals typically negotiate their operating budgets with the hospital -- with the central payer, the reimbursement agency throughout the year. Many do it in the first half of the year and that’s one of the reasons why we have a lot of feed from many of our key accounts, but some do in the second half of year as well. So I think that on a go forward basis certainly the progress that we had in the first half of the year will definitely help the second half of the year. And as we progress through the second half of the year, those hospitals that have established the reimbursement that will continue to accelerate I think our adoption and usage in Germany.

Great and one follow-up with the question on the ECMO kit launch. Can you give us a little bit more of a download on the opportunity there and any more specifics around timing when that can get into the market place?

Yes, ECMO is extracorporeal membrane oxygenation and it was -- it's a device that can oxygenate blood outside of the body when the lungs cannot. And it's been used predominantly in the past as a rescue therapy when the mechanical ventilation fails. So even piping in 100% oxygen into lungs peoples lungs are so filled with fluid or blood or debris that there is very little gas exchange that occurs into the blood, and those patients will develop refractory respiratory failure and die. So instead, our former Chief Medical Officer, Dr. Robert Bartlett had pioneered ECMO, as a way to provide gas exchange outside of the body like you would do in open heart surgery for example. I think there has been a resurgence in the interest in ECMO away from being just strictly a rescue therapy, but really being use as a primary therapy for not only gas exchange but also for hemodynamic support because of the new mode called venoarterial ECMO, which takes blood out of this veins and pumps it directly into the arteries. So I think provides blood pressure support in doing so. I think that we have now as we disclosed last quarter, we've had more than a 1,000 ECMO treatments where CytoSorb has been used in conjunction with ECMO to help reduce the inflammatory toxins that area causing recent [indiscernible] havoc around the body particularly in the lungs. And so, whereas ECMO is used again for gas exchange and hemodynamic support, it is nothing to reduce the toxic inflammatory burden that is common in patients with life-threatening illnesses in sepsis, burn injury, trauma, pancreatitis and many other illnesses. But with our therapy, I think clinicians have been having success in helping stabilized those patients. So, we are by far one of the leaders in this field, we are the leader in this field I would argue. And we believe that this is a very important growth area for us and this ECMO kit allows us to be able to swap out the device on a daily basis without causing any undue risk to the patient on ECMO.

And this is my last question just on the clinical development program in the U.S., the REFRESH trials. Congratulations on -- I know Dr. Mortensen any -- is there any timeline that you can provide? And I understand that there may be other specific timeline, but just in terms of the IDE submission for REFRESH 2. Are you still on track to begin enrollment by the end of the year? And then lastly just, should we be expecting publication of REFRESH 1 sometime in 2017? Thanks for taking the questions.

Sure. So before I turn it over to Eric to comment on our timeline for REFRESH 2, the REFRESH 1 study has been published, we are responding to reviewer comments and will be resubmitting that back very shortly. That is plan for this month and so our hope is that, it is accepted and published this year, but we'll have to wait and see on that. Eric would you like to try to comment on the timing of our submission and whether or not we are on track with REFRESH 2?

Sure, Phil. Just first of all I answer the question I just want to thank you for the extraordinarily gracious introduction. Now, I'm happy to be coming on Board and just note that I hope to be able to satisfy the very high expectations you provided and fantastic being on Board the past 67 days at this point in time, so thanks for the entry. Getting back to the question, currently, we expect the 2017 so much that we are planning for success at this point, and we are well underway and working with contract research organizations to have resources in place to support the study initiation with later this year. Now off course that can be subject to a successful conclusion, but our discussions with the FDA and for that reason we are looking diligently to ensure that the study design incorporates in our prior discussions with the agencies as well as recent experience in this therapeutic area in order to be able to accelerate toward both clinical approval as well as the study initiation.

And moving on from B. Riley, we have Andrew D'Silva.

Just a couple of quick questions. First off, as you’re talking about growth particularly in Germany. Do you feel like now that you’ve got this reimbursement code that even though your revenue base in Germany is larger than it has been previous years that the same growth rate from a percentage standpoint is possible, now that primary majority of the device and the procedures covered?

Yes. I think there we're just scratching the surface of the market in Germany, but we’ve laid the foundation for growth. We have strong key opinion leader support from throughout the country. We have strong support for major medical societies, ranging from the German Sepsis Society to the Society of Nephrology and Cardiothoracic Surgery. So we think that with this reimbursement and other societies for that matter. And with this reimbursement, increased reimbursement, we think that this will be relieving a major bottleneck on CytoSorb sales in Germany and expect to see an acceleration of CytoSorb growth and usage in Germany, as we go forward. As we mentioned last year that we achieved a $1 million in a single hospital count, we think that is very easily plausible in many of our existing accounts on a go forward basis, and we hope to be able to show that to you in the coming quarters.

And just touching on a $1 million hospital. Is there particularly indications that they’re seen or utilizing CytoSorb more in and having success in? And are they fully integrated throughout various divisions of that hospitals or just particularly one segment?

We have strong usage in both critical care as well as in cardiac surgery at that account. So I think it helps to validate the focus on these two verticals.

Just a couple of more quick questions for you. Are you just spending a little bit time with the U.S. Military in various capacities? Is there anything new going on there? Obviously, they don’t need to go through the full approval process domestically to start placing orders in case of emergencies and things of that nature. Can you give any color on how discussions are going or what opportunity might be lying ahead?

Well, we’re looking very much for the MHSRS Conference, the medical -- it’s a medical scientific healthcare research symposium or the combat casualty care conference later this month. We’ve actually been selected to present a number of posters and we will have quite a few meetings lined up to talk about some of the exciting new data that we have in our R&D program that are funded by the military as well as some others that are external collaborations with some other universities. So we hope to be able to share those exciting data in the future. But I think that based on what we see, there is a lot of opportunity here to help our war fighters and our soldiers, our brave men and women in the future.

Last question, just as it relates to Novartis, Dr. June, Penn and CAR-T recommendation by the FDA. Could you may be explained a little bit of how that dynamic work there? I know that Novartis has a global collaboration agreement with Penn and Dr. June is the head of that division at Penn. It tends to have highly involved with Novartis and if so, what is there solution right now for cytokines release syndrome? And how do you think things progress with you guys going forward?

I can't really stick to the strategy at Penn. I would be out of place to do so. But that being said, I think that when you look at most of the CAR T cell immunotherapy therapy studies. What you will find is that cytokine release syndrome is the primary adverse event that happens in this illness, whether or not it’s a traditional cytokine storm leading to organ failure and potentially death or it’s the encephalitis that occurs from on target but off tumor effects for the CAR T-cell immunotherapy therapy in the brain and others. And we think that there is a role for CytoSorb in the treatment of those types of excessive inflammatory reactions. Today, the standard of care while the "standard of care therapy" is to use tocilizumab which is an anti-IL-6 receptor antagonist, as the first line therapy to try to control that cytokine release syndrome. But if you talk to many in the industry that it sometimes works and sometimes works very well, but in many cases does not work and then they have to turn to high dose steroids, as it means that they exclude to shut off the immune response, but the problem with high steroids is that it can trigger apoptosis in the CAR T-cell immunotherapy therapy. And when you're talking about -- if you look at some of the published reports that are out there that one therapy for one patient could cost north of a $0.25 million, what you don’t want to do is potentially jeopardized that immune therapy. So what you want to do is just bring it under control, so that it can then hunt and seek outs the cancers and kills those cancer cells. So we think that CytoSorb represents a good interim strategy, a strategy between tocilizumab as well as between steroids as a way to treat cytokine release syndrome.

Moving on from Aegis Capital we have Evan Wang.

First of all regarding sepsis, I know you guys are getting more and more data from patients in Europe. Just wondering, if you can give some update on your thoughts on, what you guys need before you initiate a large U.S. trial in sepsis?

So I think as we try to outline in the presentation, the goal is not to do the big large scale study, all commerce study. I think that that has been one of the failings of most clinical trials is that heterogeneity that comes with taking all patients from all walks of infection, walks of life. That is not the way to do these clinical studies. We believe that the smarter strategy is to focus on those subgroups where CytoSorb has worked very well and very reproducibly, and conduct initially validating studies in those areas. And then pivotal studies to either obtaining approval or expand the label for CytoSorb in the United States and elsewhere. I think that we think that in many of these subgroups, the effect size has been observed to be so large that potentially those, even those large pivotal trials maybe not very large at all and therefore be a very good use of our resources. So that sort of where we stand at the moment and I think again with the leadership of Eric Mortensen, we plan to execute upon that strategy.

Okay, thanks for clarifying. And could you provide any kind of timeline for that?

I think that we've been going over in many different trial designs and many different areas in sepsis where we've seen CytoSorb worked very well and that we are looking to try to get a study going on in the United States as well as studies abroad as well, and we will have more detail on that as the clinical team finalizes that those plans.

Okay, thanks. And just a question on, do you guys happen to breakout the direct and the distributor proportion of product sales?

We have not done direct versus distributor, but we have done Germany versus the rest of the world. Kathy, would you want to comment on that?

Yes, I think I can give you some color on that. So Germany represented about 67% of our total sales and while we have not for the first half of 2017, so while we haven’t revealed the contribution of the other direct countries, I can just tell you that it's minimal compared to Germany. So it's not reaching say 10% somewhere in between 0% and 10%. So far still small. We just have started in Belgium and Luxemburg, so we really haven’t had a meaningful contribution from them yet.

Okay and I guess going forward. Should we expect gross margins to stay around those 65% range for products or I guess what distributors trend down a little bit as Fresenius [indiscernible] sort of kick in more?

It will vary by quarter depending on the mix of direct and distributor, but also on just a mix of distributors alone because we have different transfer pricing among the distributors. But I would say between 65% and 70% is what we can expect in the near term. And then I think it will improve once we move over and get the new facility up in running.

Moving on from Zacks Investment Research we have Brian Marckx.

So Kathy or Phil, whoever wants to say. Was there anything lumpy in the quarter? I know you get this question all the time and haven’t heard it yet, so I'll take the range this time. Was there anything lumpy in this quarter in terms of revenue, stocking order any of the such that may make sequential revenue growth to Q3 kind of the headwind?

I’ll take that. No. I mean, I think that it was pretty much strength across the Board. I think we’re seeing very good strength in direct sales, but also that a lot of the distributors have been moving forward as well. So, we’re looking forward to as we said strong second half of this year that is expected to exceed the first half.

In terms of the potential CAR T-cell immunotherapy opportunity, Phil. Can you kind of give us sort of the -- what the near term looks like from CytoSorbents side in terms of next steps and then kind of the broader view? Is this something down the road that you think maybe potential collaboration opportunity assuming in the largest candidate is eventually FDA approved that you could potentially collaborate with Novartis?

What I would say that we’ve been invited by many of the leading cancer centers that have been conducting this cancer immunotherapy trial to give a talk on our therapy. And I think there is strong interest across the Board to use therapy, but at the time mixing in a product that is not yet approved in the U.S. with another product that’s not yet approved in United States, just could not be done. I think one of the reasons why we’re so excited by the pending likely approval of the Novartis program is that, that will likely happen in the next -- there has been wide speculation that, that will happen by the end of the year. And if that happens then we could potentially be used them in post-market studies in looking at cytokine -- the treatment of cytokine release syndrome on an approved product. But again, there is -- I think a lot of interest to do so just the timing in the past hasn't been right, but I think on a go forward basis, that represents a good opportunity for us. Now, from a collaboration standpoint with the cancer immunotherapy players, I think most actually know who we are and know our technology. But again in the past, the timing wasn’t right. We hope that on a go forward basis with Novartis and then likely Kite getting the next approval. There may be opportunities for us there. And certainly our association with Dr. June is very helpful.

Okay. And then in terms of REFRESH 1 and potentially moving into the REFRESH 2. Is there anything that you can talk about relative to your recent discussions with FDA, and any feedback that they’ve given you? And in particular, is there any concerns I guess relative to the safety profile that you saw in REFRESH 2 with getting IDE proved for 2?

Yes. I think that we’ll have an update on REFRESH 2. With Eric coming on Board, I think we’ve delayed the submissions to the FDA a little bit because we wanted him to make sure that he was up to speed on all data analysis and up to speed on the clinical trial strategy. I think he's done a fantastic job in terms of optimizing the protocol to try to increase the chances of both technical as well as clinical success, and we’ll have an update for you when appropriate.

[Operator Instructions] Next from Maxim Group we have Jason Kolbert.

Hi, guys. Jason is here with Gabrielle Zhou, I see that starts building but I think it'd be really helpful for us to step back a little bit and say, what it takes to guess a clinical mass for sales? And what would your target for clinical mass [indiscernible]? That’s the first part. Yes, we're very excited about -- yes, we're very excited about the prospects in the U.S. clinical trial. What I'm trying to understand is given the week to week driving effort by the sales force in the globe. What's it going to take to hit some more significant numbers?

I think that what you're seeing already is that there is a very nice upper trend on year-over-year basis in terms of sales growth. I think that is reflecting that the progress that we're seeing both in our direct territories but also in our international sales. And we expect that our partners and their progress will be able to being further catalyst to that growth. So I think that what you're not seeing is linear growth, right. You're seeing -- if you go back to that 12 month chart here that you can see, there is a very nice acceleration of growth. Now, our interim target is to get the operating profitability. We think that that will be an important inflection point for our business, and we will significantly cut down on the cash needs of the Company, but also make our company much more attractive to a wide variety of different interested groups. And so I think that 20 million sales we're guiding that we will hit that in 2018, representing a doubling of sales of trailing 12 month sales from this point, that's nice growth. So I think that if you track the sales growth of other medical device companies for other companies in general, that growth is led to significant increases in market awareness and ownership of stocks across the Board.

Hi, it's Gabrielle Zhou. I do have a follow-up question in terms of increasing the sales. So if you can deploy more resources, do you think expense raise as sales people to drive the revenue growth?

I mean with greater resources that -- what we're trying to do is have a balance of strong growth but also the ability to achieve operating profitability. Growth obviously is the primary concern, but it's not growth in all cost. I think that you may have seen NxStage medical today. They've grown at a tremendous rate over the years. They had about 375 million in sales. Fresenius just bought them for $2 billion, but they were still losing money as a company. It’s a fantastic company, fantastic products. We know them. We've collaborated with them in DARPA, but nearing profitability, they are on the verge of profitability and they were taken out for roughly five to six time sales. So, we think that there is a lot of premium to be based on hitting that point. And again after we get the operating profitability -- that breakeven point, we expect a $0.50 on every dollar will drop to the bottom line. This could be very profitable company. So, there was the balance that we're trying to achieve between growth as well as profitability, but certainly we're adding as we see fit -- while we're adding headcount in key areas where we think it will have the biggest bank for the buck in terms of driving future growth in the Company and we're not afraid to make those investments that we've been doing so.

Moving on from H.C. Wainwright will hear from Sean Lee.

I just have a quick one. You mentioned that Fresenius is planning to start co-marketing CytoSorb in five additional countries soon. Could you provide a little more color on the relationship like how has it helped your revenues or at least helped CytoSorb with the visibility you are doing?

Sure. While I think that before I turn it over to Chris for some commentary and some color, it's kind of very interesting when you look at the Fresenius acquisition in NxStage Medical that was announced today. It fits very much in line with the overall strategy that Fresenius has to both grow in the hemodialysis market, but also grow in the critical care market. It's not well known that NxStage was actually a leader in critical care sales in the United States. It was one of the top two players next to Baxter in the U.S. and their market share was actually very large. And so I think it plays into the overall strategy that Fresenius has speaking just strictly from what has been publically announced of strong interest in their believe that hemodialysis is a key to growth, but also that critical care is a key to growth. So, we, I think, also fit in that strategy where we are the high margin disposable that fits into that whole game plan. That being said, let me have Chris maybe offer some color on where we are with that co-marketing agreement.

This is Chris. So, the co-marketing work has made some significant strides in Q2. The generic process which we had worked out with the headquarters, things like the set up requirements in sales process rose responsibility has been kneel down and we now started to initiate discussions with the local in country FMC sales management as well as our distributors to co-ordinate the implementation for each countries, and this will move on a country-by-country basis. And this is something that this will involve support from Dr. Christian Steiner and his teams. So we're working closely to make this happen along with our distributors, and as Phil has said, we are planning to start with five countries right now that are all active with our products and the plan is to rollout it out, perfect the model and then scale it to other countries. So just want to make sure as we take it broader beyond that which should be relatively easy to do once we have worked out all of the process across with an optimized kind of co-marketing models. So that's where we stand right now, so I think we will see it move relatively quickly as we finish off the rest of the year.

My second question is on the reimbursement. And from the looks for it, it had have been a major driver in the growth in German. We have news over the last two quarters. Is the Company or any of your distributing partner looking to expand the reimbursement to in other countries as well?

Absolutely, I think that we -- CytoSorb is being reimbursed or paid for to a variety of different mechanisms in different countries. But we certainly are looking to focus and have the resources focus on trying to achieve reimbursement or enhance reimbursement in major countries, where that our strategic to our overall growth. So I think that, those plans are moving along, and I think with the addition of additional data, clinical data, and other things that we believe that, we will be making progressive improvements in reimbursement across the Board. So I think it just takes time. The things are not fast. They actually require a lot of resources, but it is one of our -- the focuses of our commercialization efforts.

Ladies and gentlemen, that does conclude our question-and-answer session for today. I’d like to turn the floor back to management for any additional or closing remarks.

Well, thank you very much. Well, I just like to add that I’m very proud of the CytoSorbents' team and the work they’ve done to help us achieve the success we have to-date. In addition all of here at CytoSorbents extends a sincere thanks to our Board as well as all of you or well shareholders for your ongoing support. As we look forward, we have several updates on our ongoing programs and look forward to providing regular updates on our quarterly call. So thanks everyone for taking the time for this update call. We appreciate your participation. And if you have any additional questions, please reach out to Bob Yedid, at bob@lifesciadvisors.com, and we will try to get to you answers to your question where possible. Thanks very much.

Thank you. That does conclude our conference for today. I would like to thank everyone for their participation.